This paper analyses the issues at stake in liberalizing Europe’s transportation networks.
European public transport at a crossroads
Liberalization is coming and Europe needs to get ready—fast.
Driven by the European Commission and by recent European Court of Justice rulings, hundreds of cities will be forced to open their local bus, tram, and subway systems to private competition over the next few years. Although deregulation will offer cities across the European Union a unique opportunity to create superior mass-transit systems, regional and municipal transportation authorities are doing little to prepare for the coming revolution. A misstep on the road to a more open market could be perilous.
As similar efforts around the world have shown, liberalizing transportation networks is particularly difficult. Transit authorities and local governments must balance the public-service obligation of providing affordable transportation for everyone with the need to create an efficient operating model.1 They must also ensure that private competitors have access to existing public rail lines and other infrastructure—a move that may mean breaking apart highly integrated value chains. Meanwhile, public owners looking for a quick cash infusion often sell their best assets cheaply but remain saddled with substantial payments for their employeesâ€
pensions, health care, and severance packages. The quality of public-transit systems may plummet as private operators attempt to keep costs to a minimum.
Private players are already eyeing the prospects. Two large private multinational companies, Connex and Arriva, have learned much from their experience with liberalization in Britain and Scandinavia and are now moving on to the Continent, buying available routes or small and midsize operators in France, Italy, and elsewhere. Currently, none of the private players has the financial or managerial capacity to take complete control of a large network, nor would the industryâ€
s fragmented structure allow them to do so. As a result, their immediate strategy is to cherry-pick established small or midsize regional companies.
Incumbent public operators, which will find it very difficult to compete successfully for routes put up for open bid, could well lose their best networks. Without these profitable and attractive routes, losses—and the need for subsidies—will continue to mount, creating a deadly spiral. Local and regional governments, facing not only budgetary shortfalls but also EU mandates, will be hard-pressed to come to the rescue. The situation might be more serious in some countries joining the European Union during the current round of expansion.
A better choice
European transit authorities do have another option: to improve the incumbents’s operations and compete head-on with private companies. At the very least, the incumbents will command much higher prices if the time comes to sell. The effort will undoubtedly be difficult. Politicians will soon face unpalatable decisions about job cuts, and transit managers will have to develop skills that were not necessary when they could rely on government largesse to subsidize their systems’s inefficiencies.
But the gains could well be substantial. We looked at more than two dozen public and private transit operators in Europe to identify best practices. Our research suggests that public-transit systems in Germany can harvest operational improvements, mostly through cost savings, of up to 20 percent, which would bring their costs into line with those of private operators. Other European systems still without a competitive regime—that is, all of them except systems in the United Kingdom, Scandinavia, and parts of Germany—face similar challenges at the local and regional levels. Their managers should act soon if they hope to compete against private compani es when liberalization begins, because operational changes, and job reductions in particular, will take many years to implement fully.
Performance improvements can be unleashed in almost every area, but the greatest potential lies in sales and marketing, operations, and personnel. In sales and marketing, we estimate that cost savings of up to 6 percent are possible. Automating ticket sales and introducing smart-card technology could boost efficiency and the quality of service. Better marketing—discounts to families or other price-sensitive groups, for instance—can boost revenues by increasing ridership. Cost savings of as much as 5 percent can be had through better operational performance; IT-based planning, for example, can increase the utilization of buses and trains as well as staff time. Costs can be cut further by relaxing traditional guidelines that have little impact on service quality or safety, such as the interior design of buses and railcars.
Personnel, the largest expense for a public-transportation system, accounts for perhaps 50 percent of total overhead. This is also the most sensitive area to confront. A serious program must do so, however, because the cost can generally be reduced by as much as 9 percent across-the-board without sacrificing service. The savings could take three to four years to realize, depending on the approach. A program that relied solely on cuts through retirement and normal attrition could take longer, while reductions that minimized legacy costs—for instance, by transferring workers to other public-service jobs—would be faster.
After the first steps
Bringing operational performance up to best practice is just the first step in what will ultimately be a difficult journey toward survival. These measures, if implemented successfully, can put the public incumbents on par with private competitors, but more remains to be done.
The transit industry in Europe is highly fragmented. In Germany alone, some 400 public and private operators share a market split among hundreds of towns and cities—a situation echoed across Europe. As liberalization progresses, market consolidation is inevitable.
Incumbent operators aspiring to long-term survival will therefore have to plan for consolidation. In doing so, they can follow any of three paths to a sustainable competitive edge: scale (amassing a bus or rail network across a large market), scope (offering all transportation options within a single market), or specialization (carving off a unit with particular expertise, such as fleet maintenance). But any such strategy would be expensive, and incumbents cannot expect public money to finance it. Their best option will likely be to form alliances and partnerships with private operators, which not only have better access to capital but also can help them develop the necessary skills to pursue such ambitious objectives.
At the same time, transit authorities and governments must adapt to a new role that includes administering a network comprising both public and private operators. Avoiding fare increases and a deterioration in service is also an important factor in managing liberalization. As experience has shown, the authorities can accomplish these goals by giving careful thought to the size and composition of the routes being offered for bid and to the duration of the contracts. Developing oversight skills for a newly liberalized transportation system will also be vital.
For further information, contact